Argentina's Agency for Investors and International Trade is organizing a forum in Buenos Aires from September 12 to 15 that will gather more than 1,500 global investors and government leaders from around the world. (Photo: Dalibor Ribicic)

Monday, August 15, 2016

Perspectives

How Argentina Can Rebuild Its Economy

When Mauricio Macri was inaugurated president of Argentina last December, he announced that his biggest goal was to regenerate the economy of his country. Where should he lead his efforts? Experts believe that it is crucial to restore the confidence of foreign investors in Argentina in order to attract the capital that the country needs to improve its infrastructure, production volumes and competitiveness. However, that will be only the beginning of a long road that is bound to be full of challenges and headaches for Argentina.

Macri’s election ended twelve years of populist “Kirchnerism” in the country — an era that began in 2003 with the first administration of President Nestor Kirchner, and continued during the two terms of his wife, Cristina Fernández de Kirchner. Macri entered the Casa Rosada [“Pink House”] – Argentina’s equivalent of the White House – with promises of transforming his country into an economic model for Latin America. Macri said he aims to turn Argentina into a prosperous nation that attracts the attention of international investors who are eager to do business in that resource-rich nation.

The first and foremost step in that direction was taken on April 21, 2016, when the new chief executive delivered the $9.3 billion that Argentina owed to the so-called “vulture funds” — the 7 percent of Argentina’s creditors who had rejected the negotiated restructuring of the country’s debt in 2004 and 2010, and then decided to claim their funds in New York courts. In deciding to deliver those funds, Macri put an end to fourteen years of default and returned Argentina to international debt markets.

The Macri government’s next goal is to return to complete competitiveness in a globalized world. After six months in power, and an analysis of the situation, Macri’s economic team estimates that in order to reach that goal, Argentina needs investments worth some one hundred billion American dollars.

Mauro Guillen, director of Wharton’s Lauder Institute, explains that Macri has been “trying to unblock the situation internationally by reaching agreement with the various bondholders while at the same time trying to keep the opposition in Argentina under control. The various unions in Argentina are deeply divided.” Recently, however, “the three major union groups have come together [because] they want to oppose what the [Macri] government is doing.”

The international situation is particularly troubling, given that until three or four years ago, “Argentina was benefitting big time from China’s growth in terms of exports of soy and soy beans and so on,” Guillen notes. “It is a difficult situation, but Macri has the support of the business community and of the international community. When he came to power, I predicted that the [opposition party known as the] Peronists were going to make his life nearly impossible. So let’s see if he can survive his first year in office without any major problems.” According to the Buenos Aires Herald, no democratic non-Peronist leader has managed to complete his term as Argentine president since Marcelo T. de Alvear did so in 1928.

When it comes to the new investments that Macri hopes to attract, “Beyond the [dollar] amount of the investments, the most important thing is how those funds will be applied,” notes Enrique Lucio Kawamura, professor at the University of San Andrés in Buenos Aires. The dollar value of such investments is debatable, since the exact figure usually depends on many assumptions that can almost never be perfectly known in advance, says Kawamura, who has been studying both the productive sectors where those investments will be realized as well as the kinds of investments involved. “It is not the same thing to invest a certain amount to acquire new ‘know-how’ about production processes that discretely increase productivity as it is to invest that same amount simply in replacing depreciated machinery, for example.”

Guillen notes that Macri is not only a successful business person but also someone who has been in the public eye in Argentina for a very long time. Son of a prominent Italian businessman in the industrial and construction sectors, Macri gained national recognition in 1995 when he became president of Boca Juniors, one of the two most popular football clubs in the country. In 2005, he created the center-right electoral front Republican Proposal, known as PRO. Explains Guillen, “I think he is very committed to making a difference in Argentina, and I don’t think he is going to shy away from the challenges or give up. He understands the stakes and he knows that no matter how tough the situation gets, he needs to persevere, to be very forceful. He has a lot of enemies; everybody does in Argentina. I think he is keenly aware of that; he understands the Argentine political system, not just as a business person but as a politician.”

STRONG SUPPORT FROM U.S. & EUROPE

“Macri has the support of the business community and of the international community,” notes Guillen. “Both Europe and the United States are very supportive. Europe and the United States have long been suspicious of the Peronists and the Kirchnerists. Everybody outside of Argentina – in Europe and the United States as well as in Mexico and Chile – was hoping that Macri would win, so he has a lot of political capital” in those countries. “At the same time, he is seen as an enemy by Bolivia and Venezuela and Ecuador,” whose populist governments are opposed to Macri’s free-market reforms. In any case, “Europe and the U.S. matter much more now, especially in terms of reaching financial deals and insuring that there will be more foreign investment in Argentina. That is one of the key advantages that he has.”

In July, the German-Argentinian Chamber of Commerce announced that “German companies in Argentina welcome the change in economic policy by Macri’s government,” which should improve the competitiveness of Argentine industry and lead to “a sustainable economic recovery.” The Chamber said that German companies plan to invest about $3 billion in Argentina over the next four years as they welcome changes in economic policy. That month, Macri and German Chancellor Angela Merkel met in Berlin, marking Macri’s first visit as president to Europe’s biggest economy. At a joint news conference, Merkel said, “Nothing stands in the way of closer German-Argentinian cooperation.”

Rather than focus on specific numerical targets for foreign investment in Argentina, Martin Simonetta, professor of political economics at the University of Business and Social Sciences (UCES) in Buenos Aires, and director general of the Atlas Foundation for a Free Society, stresses the critical role of building confidence in the country. “It is an enormous challenge to reform decades of economic, political and institutional disorder as well as the resulting disinvestment that the Argentine economy has experienced,” says Simonetta. For this reason, it is fundamental “to recover the lost confidence in the country.” It is also necessary to reform Argentina on a foundation of predictability and transparency that makes it possible to forecast the medium and long term beyond changes of government. “If we manage to rebuild that brand of trust and credibility, investment will recover as a natural result. Regrettably, however, once confidence is lost, it is not re-built from one day to the next,” Simonetta adds.

In a key initiative aimed at rebuilding international confidence, Macri’s team recently created the Argentine Agency for Investors and International Trade, which is responsible for spreading word about the changes occurring in Argentina and building an attractive image for the country. In a major promotional effort, the agency will mount the Forum in Buenos Aires from September 12 to 15. The event will bring together more than 1,500 global investors, government leaders from around the world, and CEOs of Fortune 500 companies from a wide range of sectors, including energy, finance, information technology, infrastructure, agriculture and health care. Speakers will include senior executives from BP, Boeing, Siemens, Coca-Cola, Unilever, Dow Chemical and Lazard.

According to Simonetta, Macri’s investment priorities should be to modernize Argentina’s road and railroad infrastructure, and to increase funding for agriculture, mining and renewable energy. One of the most ambitious infrastructures is called the Belgrano Plan. Its goal is to promote the northern region of the country by investing 2 billion dollars in its infrastructure. The Plan also incorporates initiatives for creating some 250,000 housing units, and providing tax and labor incentives for those companies that set up operations in that region.

According to Kawamura, the government’s private investment priorities should be to increase the productivity of those “dynamic” sectors that have high potential for exporting, such as software and highly differentiated manufactured goods, as well as agribusiness industries that meet the demands of markets in Asia in ways guaranteed to generate a “sustainable” flow of foreign exchange. In that regard, he believes that it is “important to have a strategic plan for thinking about specific policies that introduce appropriate incentives for private investments that have such a goal.” When it comes to public sector investments, he says it is necessary “to undertake policies for investments in transportation infrastructure that guarantee the reduction of costs in the most efficient ways possible. The goal of such a strategy is to make important decisions that generate pressure on unions and other stakeholders … who threaten to act against that efficiency.”

Beyond economic considerations, Kawamura argues the importance of building a reliable structure for making public sector decisions. He believes that there has to be a much more profound discussion about whether the system – as it works today – does not threaten these economic goals, “since its functioning sometimes produces a short-term bias, which does not help to implement even the minimal amount of credibility that guarantees reasonable returns for those sectors exposed to significant amounts of investments over the long term.”

Along the same lines, Simonetta argues, “The priorities are institutional. That is to say, to invest in building a political framework that enables people to make decisions and plan with goals for the medium and long term as a result.” At the same time, he notes that “the country’s potential is unlimited.” He believes that there is an enormous opportunity in the agribusiness sector, “which possesses a prodigious amount of resources in an unprecedented context of growth in world population, and a resulting growth in demand for food.”

NEW DIRECTIONS IN TRADE POLICY

Another key to Macri’s strategy is to integrate Argentina into the South American market. In so doing, Macri is distancing himself, however, from the policy directives laid out by the previous government, which committed itself to the regional development model developed by Mercosur (founded in 1991), a trade bloc that comprises Argentina, Brazil, Paraguay, Uruguay and Venezuela. In so doing, Cristina Fernández de Kirchner was distancing Argentina from the Pacific Alliance. Launched in 2012, the Pacific Alliance trade bloc — comprised of Chile, Colombia, Mexico and Peru — provides some 40% of Latin America’s total Gross Domestic Product, almost 60% more than Mercosur, according to the World Trade Organization. However, ex-President Fernandez de Kirchner was afraid that the Alliance’s goal of promoting free trade in capital and services could damage some less competitive sectors of the Argentine economy. Macri’s turnabout has been total in the sense that Argentina has already become an “official observer” in the Pacific Alliance, the first step toward its eventual full membership in the grouping.

Simonetta believes that it is “fundamental” for Argentina to integrate itself into the global economy, but that Mercosur is not the best way to position Argentina in Latin America. “Mercosur was a useful tool in its time, but the integration process has been stopped. Nowadays, the Pacific is the fastest-growing region on the planet, and Argentina must jump onto that train. We must be part of the dynamic processes of integration that speed up the growth of the economies [of the Pacific region], and we must leave behind the protectionist fortresses” of the past.

However, Kawamura warns, “Free trade, in itself, does not guarantee any greater competitiveness” for Argentina. The country must establish greater participation in international markets, “but through an integral plan of incentives for investments that generate the increased productivity that assures us that the greater participation [of Argentina in such markets] also spurs a substantial increase in the exports of those products that are not necessarily primary products in the agribusiness sector,” where Argentina has traditionally been competitive. He adds that it is important “to analyze our country’s capability to negotiate a potential entry into the Pacific Alliance with respect to other member countries.” Argentina should analyze its “comparative advantages, in order to prevent its entry into this sort of trade group from leading to balance of payments problems that [wind up being] hard to resolve.”

OPTIMISM DESPITE THE CHALLENGES

Are Macri’s chances for charting such a course for Argentina already beginning to fade? His approval ratings dropped from 51 percent in March 2016 to 44 percent at the end of May, according to Management and Fit, a polling company in the Argentine capital. In August, however, Macri’s Finance Minister Alfonso Prat Gay announced that the economy was already showing positive signs, and that it would grow again this year. Prat Gay added that Argentina’s economic reintegration to the world is already helping the country attract the foreign capital that it needs to control inflation and encourage economic activity. “The hardest time has passed,” Prat Gay assured reporters, referring to the government-sponsored utility hikes and the peso devaluation. “We are much better than many believed. We have made progress in the first six months. There was a recovery in May that was confirmed in June.”

For his part, Guillen has not abandoned hope. “I am optimistic. [But] let’s not minimize the difficulties that [Macri] is facing with the domestic political situation. He has sworn enemies, and they are going to do whatever they can to make him fail.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.